Reform Key to Latin America Success in 2013

By Ben Levisohn

REUTERS

What’s the key to investment success in Latin America in 2013? It may be economic reform, says Wells Fargo’s Sean Lynch.

In a report to clients today, he notes:

Even though [Brazil, Chile, and Mexico] face on-going important structural challenges, this group of countries continues to pique investor interest. Looking ahead, we believe important government policy reforms hold the key to whether [they] create additional economic and investment opportunities, and the success of these reforms will help answer the question, “Can Latin American take the next step?”

Nearly two-thirds of the Mexican government is in favor of passing additional reforms and next on the agenda are much-needed changes to energy and fiscal policy. The aim of these reforms is to make Mexico more competitive on a global scale and includes the privatization of state-owned enterprises, such as oil giant Pemex. While, initially, these reforms may not be material, they are targeting areas that were once considered off limits for the government.

While Mexico, Chile, and Brazil have improved their economic outcomes and investment opportunities by concentrating on particular commodities and trading partners, these countries today still wrestle with lack of economic diversification. Moreover, these countries also have to contend with political and social institutions generally not well equipped to counter the economic importance of a single commodity or trading partner.

His conclusion:

There are already signs that Chile, Brazil, and Mexico are preparing to take the next step on the path to sustainable long-term growth, but we will continue to watch these markets for confirmation of the positive developments necessary to keep them on this path. Our investment recommendations echo our long-term optimism but shorter-term cautionary view.

Reform has been good to investors in 2012–while lack of it has held other markets back. Mexico has pursued economic reform in 2012 and the iShares MSCI Mexico Investable Market Index (EWW) exchange-traded fund has returned 31% this year, more than the 4.6% return of the iShares S&P Latin America 40 Index ETF’s (ILF) 4.6% return. Brazil, however, appeared to take a step back, and the iShares MSCI Brazil Index ETF (EWZ) gas dropped 1.5% this year.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. The Barrons.com Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools.